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Source link: http://archive.mises.org/8710/is-plan-b-a-return-of-the-deutsche-mark/

Is Plan B a return of the Deutsche Mark?

October 6, 2008 by

Today the German finance minister said that the government is attempting to build a “shield” for the German financial industry. And that there is an undetailed Plan B in the works as well. No word from France on a counter-shield endeavor (although Sarkozy probably wants one now).

This comes days after the German government announced that all personal bank accounts would be insured (guaranteed) by the central bank. A victory for the taxpayer, right?

Combined with a sovereign debt rating of AAA – a rarity in the EU – it appears that Germany’s unilateral actions could make it a destination for wary investors (capital flight) from other European countries. This very situation was apparently one of the catalyst behind a proposed EU-wide bailout that fell apart last week. A coordinated versus uncoordinated bailout — and the German political class didn’t want to get the short end of the stick, so they backed out. Also a first, right?In addition to being the first-mover and despite having an 7.2% unemployment rate, Germany may have an unseen (temporary) advantage over the increasingly moribund ‘PIGS’ economies (Portugal, Italy, Greece, Spain) that have devolved into emerging markets. For in an odd twist, over the past several months many Europeans have begun to discriminate what kind of Euros they are holding, screening out the notes printed by the Latin banks (the ‘PIGS’) and holding only those printed by Bundesdruckerei.

And while these actions may temporarily stave off steep declines in Deutschland, it cannot outrun the corrective swings and along with the rest of Europe may become another Iceland when the dust settles.

Of interest: where is the German taxpayer in all of this? Besides Hypo Real Estate, what other firms will they be forced to bail out? Who is ultimately financing the deposit insurance? And since the DM is still in circulation, will it eventually suffer the fate of Gresham’s Law?

See also: The Bailout Reader
The Recession Reader
Paul Kedrosky on modern-day German banks
Hans F. Sennholtz on Hyperinflation in Germany
David Henderson on the German Economic Miracle

{ 3 comments }

Ohhh Henry October 6, 2008 at 2:20 pm

Niall Ferguson and Laurence J. Kotlikoff predicted the demise of the EMU (European monetary union) in 2000.

The Degeneration of EMU (google cache)

OR

PDF

“[H]istory offers few examples of successful adjustments on the scale necessary [in order to balance the competing needs for spending cuts and tax increases among the partners of monetary unions]. What it does offer are several examples of monetary unions disintegrating when fiscal strains became incompatible with the unpleasant arithmetic of a single currency. In this respect, conventional measures of fiscal balance like debt and deficit ratios to GDP understate the magnitude of the eurozone’s problems. Generational accounting suggests that EMU ucould degenerate—not overnight, but within the next decade.”

I would say we’re more or less right on schedule.

Inquisitor October 6, 2008 at 8:07 pm

Greece is not a Latin country…

Tim Swanson October 6, 2008 at 10:58 pm

Inquisitor, that’s a valid point — however it is typically lumped in with its cousins. Perhaps they should be called the Alphabet economies.

More on the PIGS: “Why Southern Europe’s Economies Don’t Compete”

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